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Did NFP Jump?

The question for traders today
Is what will the jobs report say
Did NFP jump?
And was there a bump
In prospects for increasing pay?

As is common on Payroll days, market activity ahead of the release has been muted. While we did see weakness in Asian equity markets, European shares have been much less exciting and US futures are pointing to a very minor downtick on the open. The dollar continues to show broad strength, resuming its recent march higher against the euro and the yen, while commodity prices are mixed. Finally, Treasury yields continue to trade between 2.92%-3.00% as investors seek the next clues as to the Fed’s likely path. Of course, we know they will be raising rates, the question is just how fast.

So here is a quick recap of market expectations this morning:

Nonfarm Payrolls

191K

Private Payrolls

190K

Manufacturing Payrolls

15K

Unemployment Rate

4.0%

Participation Rate

62.9%

Average Hourly Earnings (AHE)

0.2% (2.7% Y/Y)

Average Weekly Hours

34.5

If you recall, last month’s NFP number was a much weaker than expected 103K, but the month before that showed 321K. There may be some seasonal adjustment issues, but in the end, the economy continues to find room for roughly 200K new workers each month and has done so for the past five years or so. But as we have seen lately, there is likely to be a great deal more attention paid to the AHE number, as it is the direct inflation data point from the report. Yesterday’s data showed that productivity growth was even slower than expected at 0.7% while Unit Labor Costs rose a robust 2.7%. It is data of this nature that has the Fed concerned that inflationary pressures are building more rapidly than they are currently forecasting. Weak productivity growth is just not going to help the case for either economic growth improving or inflation moderating. However, until the release, there is nothing else to discuss on the subject.

Turning elsewhere, Eurozone PMI numbers were released and showed that the trend in growth there and in the UK continues lower. This is especially disappointing to the many confirmed euro bulls as the weakness in Q1 was being attributed to bad weather throughout much of the continent. However, this is now the second month of Q2 and the trend lower continues to point to a slowing growth trajectory. For the ECB this is a problem as they have been chomping at the bit to end QE. But how can they justify removing policy accommodation if the growth picture continues to slow and inflation alongside it? My argument is they cannot, and that the much-discussed ending of QE in September is likely to be delayed further. The current market expectation is for the ECB to discuss its future plans at the July meeting. There had best be an upturn in the data if they expect to change the current policy settings.

At this point, it may be fair to say that the synchronous global growth story is dead and buried. While the US has been hanging on quite well, arguably on the back of significantly increased fiscal stimulus, we are not seeing that elsewhere. And this could be an even bigger problem for emerging markets than for the rest of the G10. EMG currencies have been under significant pressure for the past month as the combination of higher US rates and a stronger dollar are a heavy weight. In fact, we are starting to see some cracks in the weakest members with TRY and ARS both falling to new historic lows; the latter despite an emergency 300bp rate hike yesterday. As I have written before, those countries that run significant current account deficits and fund in dollars are likely to see their currencies fare quite poorly. So Brazil, the Philippines and India are amongst the potential biggest losers on this basis. This is something to keep in mind for hedging decisions going forward.

And really that’s all there is ahead of the data. With the FOMC meeting behind us, we get five Fed speakers today although four of them are after the markets close. However, this will be the first we get to hear about what the tenor of the discussions were at the meeting. My guess is we are going to get some calibration on just how much inflation above 2.0% these speakers are willing to allow before getting nervous. It seems a foregone conclusion that the economy will be running ‘hot’ for a while. My concerns lie in the fact that inflation trends are very long lasting, and with the trend clearly higher, the idea it will suddenly stabilize seems unlikely. In addition, given the ongoing trade tensions, and continued strength in energy prices, the risk of a surprisingly high inflation print seems far greater than the risk of a surprisingly low one. I continue to believe that the Fed is behind the curve, and that as the year progresses, it will become obvious even to them. At that point, the trajectory of interest rate increases will steepen further, and the dollar will benefit on the back of that. But for now, I think this slow USD appreciation is the most likely outcome going forward.